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The marathon of Mauritius-based FPIs

The marathon of Mauritius-based FPIs

The marathon of Mauritius-based FPIs
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By CNBCTV18.com Contributor Jun 5, 2020 5:10:49 PM IST (Updated)

Mauritius continues to be a popular jurisdiction for non-resident investors, fund managers, sovereign wealth funds and corporates for investing in India.

Written by: Divaspati Singh and Khusboo Agarwal

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Mauritius has always held a special place in India in terms of inward investments. Be it in terms of foreign direct investments or investments through the foreign portfolio investment (FPIs) route, Mauritius has been and continues to be, a popular jurisdiction for non-resident investors, fund managers, sovereign wealth funds and corporates for investing in India.
India’s tryst with Mauritius began in 1992, with the passing of the Offshore Business Activities Act by Mauritius, which coincided with India opening its doors for foreign investment. Since the introduction of the foreign institutional investment regime in 1995, Mauritius has been a preferred choice of jurisdiction for foreign investments in India. As of March 2020, FPI investments from Mauritius accounted for approximately 11 percent (sum of equity, debt and hybrid instruments) of the total FPI inflow in India, ranking second only to the mighty United States in terms of FPI investments. By 2019, the aggregate portfolio investments from Mauritius stood at Rs 4.37 trillion.
The regulatory model of Mauritius, which provides flexibility and a conducive regime for the structuring of fund vehicles, with due consideration to the various different commercial requirements of the investors, has been the building block for the augmented popularity of this island nation. Further, the costs of incorporating and operating a vehicle in Mauritius is also fairly competitive as compared to other financial services jurisdictions.
From a tax perspective as well, Mauritius offers an efficient regime both in terms of domestic tax rates as well as well-defined and investor-friendly bilateral tax agreements with other nations. The global business companies, set up with the objective of investments outside Mauritius, is subject to a headline tax rate of 15 percent, with provisions to claim up to 80 percent partial exemptions on certain income types, resulting in an effective tax rate of 3 percent, which can be further reduced based on the actual taxation in the investee jurisdiction.
The Double Taxation Avoidance Agreement (“DTAA”) between India and Mauritius also provides an edge to Mauritius vis-à-vis other jurisdictions, be it in terms of beneficial interest withholding rate of 7.5 percent or exemptions from capital gains arising out of derivatives and debt instruments like debentures. While the DTAA, prior to the Protocol signed in 2016, exempted a tax resident of Mauritius from payment of tax in India on capital gains, the re-assessment of the DTAA in 2016 addressed the long-pending issues of treaty abuse and, with an emphasis on building commercial substance in Mauritius, did away with this exemption albeit with a provision grandfathering investments made through Mauritius before 1 April 2017.
Simultaneously, the General Anti-Avoidance Rules (“GAAR”) became effective in India from the assessment year 2018-19, which further emphasised on the significance of having strong commercial rationale behind structures. Ergo, investors favouring Mauritius, owing to its conducive administrative and operational flexibilities, coupled with the strategic and geopolitical advantages that Mauritius has to offer, namely, easy access to the African continent and strong presence in the Indian ocean and favourable regulatory regime, continues to fire-fight the odds against it and continues to be one of the top contributors of foreign investment in India, with monies flowing in from Mauritius being attributable to funds which continue to swear by the commercial benefits of Mauritius over other jurisdictions.
Fast forward to 2019, India revamped its FPI regime and notified the FPI Regulations, 2019. Under the revised FPI regime, the erstwhile three categories of FPIs have been swotted and collapsed into two categories, i.e., Category I FPI and Category II FPI. Category I FPIs, perceived to be low-risk investors, include sovereign wealth funds, pension funds, appropriately regulated entities, certain endowments and other entities from the Financial Action Task Force (“FATF”) member countries, which are appropriately regulated funds or unregulated funds whose investment manager is appropriately regulated and registered as Category I FPI or is 75 percent owned by other Category I FPIs.
Alternately, a non-FATF based entity could rely on its investment manager based in a FATF jurisdiction and registered as a Category I FPI. Category II FPIs, on the other hand, consists of entities which do not qualify for Category I.
Mauritius, while being a member of the FATF-style regional body Eastern and Southern Africa Anti-Money Laundering Group (“ESAAMLG”), is not a full member of the FATF. The ESAAMLG is an Associate Member of the FATF which assists its member states in complying with international standards against terrorist financing per FATF recommendations. Therefore, despite being committed to strengthen the effectiveness of its AML/CFT regime as per FATF, with the introduction of the new FPI regime, various funds based out of non-FATF member countries such as Mauritius, were left at sea and were forced to re-assess their structures.
By virtue of being re-categorised as a Category II FPI, such non-FATF domiciled funds were forced to relinquish the benefits of exemption from the indirect transfer tax provisions (which are available to only Category I FPIs and is an essential requirement for fund vehicles), and the right to deal in, issue or subscribe to offshore derivative instruments or Participatory Note (“P-Notes”).
After a turbulent half a decade since the amendment to the DTAA, the new financial year seems to be the harbinger of good news for Mauritius-based FPIs. In the first week of April, the Securities and Exchange Board of India (“SEBI”) revised the extant FPI Regulations, empowering the Government to notify certain non-FATF member countries as eligible jurisdictions for seeking registration as Category I FPI. In a rapid follow up to this amendment, the Department of Economic Affairs notified Mauritius as an eligible jurisdiction for seeking registration as a Category I FPI.
This implies that entities who fulfil the other conditions for being registered as a Category I FPI would not be disadvantaged by being incorporated in Mauritius. With this, Mauritius has been brought at par with other preferred jurisdictions, lending comfort to the financial services industry who have set up their base in Mauritius for unlocking access to India. With this, Mauritius with a new resolve is set to reclaim its glory.
-Divaspati Singh is Partner and Khusboo Agarwal is Associat at Khaitan & Co. The views expressed are personal
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